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In Berlin, Technology Companies Search For Elusive Exits

Zalando's Robert Gentz, Rubin Ritter and David Schneider were mum on any potential IPO plans, but did not deny the possibility of a future offering. (Photo: Andreas Chudowski)

Up until early last year, a defiant sign hung over the side of the Kunsthaus Tacheles, an abandoned department store in Berlin’s Mitte district that had been occupied since the fall of the wall. A symbol for Berlin’s rebellious nature, the emblem stood in opposition to evictions that forced out the artists and expats who had inhabited the building for more than two decades.

“Where Shall We Go Now?” read the sign in capital red letters.

That’s the same question that some of the city’s technology companies are now asking themselves as many are considering high-profile exits through acquisitions or initial public offerings for the first time. Having turned Berlin into the closest thing Europe has to Silicon Valley, companies like German online fashion retailer Zalando and audio social network SoundCloud are contemplating their futures in what could be a defining year or so for the the city’s tech scene.

“We know that our companies will need to go public,” said Lorenzo Grabau the CEO of Swedish investment firm KinnevikKinnevik, which is the largest shareholder in Zalando. “From our point of view, it’s not if they go public, it’s when they go public.”

Kinnevik also owns 24% of Rocket Internet, Berlin’s serial startup cloner, which according to sources close to the company has already embarked on presentations to gauge public investor interest. Having launched 75 companies–including Zalando–since its founding in 2007, the startup incubator could be looking to raise up to $750 million in a public listing that could happen as early as fall on the Frankfurt stock exchange, said sources. Those people, who spoke on the condition of anonymity because they are potential investors, said they were part of a group of about 150 who attended a Rocket IPO presentation at Deutsche Bank’s Berlin offices earlier this month.

A spokesperson for Rocket Internet declined to comment on any IPO plans. Zalando managing board member Rubin Ritter was non-committal about his company’s plans to go public, but did not deny the possibility in an April interview.

“It’s certainly an option,” he said.

For the better part of the last decade, Berlin has had a gravitational pull on the continent’s young tech talent who, drawn in by the cheap rent and the urban, all-hours lifestyle, have moved here to start their companies. And while plenty of the city’s smaller startups have been acquired, including Readmill (acquired by Dropbox) and Testhub (acquired by Applause), the end of 2014 could mark the beginning of a period of validation of ”Silicon Allee,” said Earlybird Ventures Partner Ciarán O’Leary.

“If you look at the big US IPOs, they’ve been a long time in the making,” he said. “And the reason for that is because people said, ‘You know what I’m not going to sell out, I’m going to wait until this one is complete.’ Of course a lot of the high-profile companies here could be sold, but instead of selling they’re saying, ‘Hey let’s see where we can go.’”

That certainly seemed to be the case with SoundCloud, which was unable to close a reported deal to be acquired by Twitter in May. Having raised $60 million in venture funding at a $700 million valuation, SoundCloud did not sell, some speculate, because the Berlin company was holding out for a higher acquisition price.

A spokesperson for SoundCloud declined to comment.

Large exits or IPOs are a “symptom of a healthy ecosystem” said ResearchGate CEO Ijad Madisch, whose social networking site for scientists relocated from Boston to Berlin in 2010. With more than $35 million in venture funding including backing from Bill Gates, the company will cross the IPO bridge when it comes, said its leader.

“An IPO may help to validate Berlin’s startup scene in the public eye, but what we really need are companies that last and companies that diversify,” said Madisch. “Silicon Valley had half a century to grow into what it is today. The iron curtain was just lifted [in Berlin] 25 years ago.”

Between Zalando’s public debut or Rocket’s IPO, which potential investors said could happen by the fall, Berlin could see Europe’s largest technology IPO since T-online’s $2.6 billion debut in April 2000. Rocket Internet, the original investor in Zalando when the company was founded in 2008, seems to have the more fully-fledged public offering roadmap after hiring former Goldman Sachs partner Peter Kimpel as its new CFO in May.

Since then, the company, which focuses on launching e-commerce companies sometimes modeled after US businesses, has been head down preparing for an offering that, sources said, will be led by JPMorgan Chase & Co., Morgan Stanley, UBS and Germany-based Berenberg. It’s unclear how Rocket, which holds stakes in its startups through a complex web of holding companies, will structure itself as a public company said one attendee of the incubator’s recent investor meeting led by CEO Oliver Samwer. The meeting included 30 minute presentations from some of Rocket’s most successful portfolio companies as Rocket tried to position itself as the number one way for investors to back e-commerce ventures in emerging markets.

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“Berlin the closest thing Europe has to Silicon Valley”? What a bold statement, in particular in light of the most recent ranking if High Tech Hubs in Europe, where Munich was coming in first (Forbes: “And Europe’s Top Tech Hub Is… “); i.e. Berlin is certainly young and hip, but not really high tech, and rather represents what some call an App economy. Nevertheless, the regional, and from this authors end useless regional competition should not lead away from the most important conclusion deriving from this analysis. In fact, Germany does not have an exit window that includes and IPO and mezzanine financing as well, which make companies exist strategies in deed illusive, unless they start elsewhere like in Israel or the US, while operations may reside in Germany. In fact, that lack of growth capital deriving from an IPO might be THE reason, why we do not see companies like Google or Amgen originating in Germany. Alex von Frankenberg (Managing Director at High-Tech Gründerfonds) described the situation most recently like this: “We had app. 40 exist, some actually pretty good, but all companies are gone”. That means all companies made their exit in a trade sale, where were assimilated and sometimes disintegrated; i.e. all investment is lost for Germany, companies have no chance to become a global player if resident in Germany. This message is almost devastating to entrepreneurs, since obviously it is part of the game to at least have the ambition to start a game changing company that disrupts existing business models and eventually benefits from an IPO in order to establish its market dominance and brand a new product or service concept. Thus, German entrepreneurs must become most creative and should not only bother with their financing strategy, with early stage being a bottleneck for capital intensive high tech start-ups, but actually must build an exist scenario from scratch that accomplishes both, attract international capital and makes investing even more attractive to any kind of investor, since the chance for an IPO is being perused equally meticulously like market access, which may sometime come hand in hand. Initiative like “The German Accelerator” or “1% for the future” (An initiative started by Biotech entrepreneurs like Klaus Kremoser and supported by EY) are a start, but should be appreciated more in public and politic as a consequence of Germany discrepancy between its innovation potential and the framework that enables bold and ambitious success stories.